Friday, August 23, 2013
Welcome to the redesigned blog! I hope everyone likes the new look.
The top end-of-week story is that American Airlines and US Airways have filed a motion requesting a November 12 start date for their antitrust trial. This is three months earlier than the February start date the DOJ would prefer. The disagreement isn't trivial, as American cannot resolve its bankruptcy proceedings without first settling the merger question. The DOJ, by contrast, wants more time to prepare its arguments.
Thursday, August 22, 2013
For those still struggling to understand the DOJ's surprising decision last week to challenge the proposed American/US Airways merger, I'd recommend two white papers from Diana Moss of the American Antitrust Institute. The arguments therein appear to be largely in line with the DOJ's thinking. The titles (with links to ssrn pages) and abstracts are below:
The proposed merger of Southwest/AirTran could meet with relatively little antitrust enforcement resistance based on the Department of Justice’s (DOJ) public statements in recent airline mergers. For example, claimed efficiencies are likely to get significant weight. Moreover, concerns over eliminating competition on Southwest/AirTran overlap routes could be mitigated because the number of routes is relatively small, there is rivalry (from low-cost carriers (LCCs) and legacies) on some of those routes, and entry may be relatively easy at some affected airports.
However, the proposed merger of Southwest and AirTran – the first major merger of LCCs – raises novel issues that may not be captured by analysis that focuses mainly on overlaps between the merging partners in city-pair or airport-pair markets. These novel issues include how the merger could potentially result in: (1) a transition from a point-to- point/hybrid system to a hub-and-spoke network model; (2) changes in the two LCCs’ price discounting strategies; (3) changes in entry or expansion patterns in new and existing markets; and (4) changes in short-term output and/or longer-term capacity decisions. These questions deserve attention in an antitrust review of the proposed merger.
For example, combining the Southwest and AirTran systems may stretch the limits of Southwest’s model, pushing the merged company away from a point-to-point or hybrid system and more toward a hub-and-spoke model. If so, then the combined company may be less able to inject the competitive discipline through lower fares, more choice, and entry and expansion than each LCC alone has brought to the industry. With the ranks of the LCCs reduced through a Southwest/AirTran merger, it is also important to consider how effective the rivalry offered by the remaining LCCs will be.
Eliminating AirTran also means removing from the market the second largest LCC (based on its presence as a low fare carrier on top routes) and the source of some of the most aggressive price discounting and market entry. Combining the maverick-like AirTran with Southwest could change incentives for the merged company to discount. And because Southwest and AirTran, as LCCs, are closer competitors to each other than to the legacy airlines, potential post-merger price increases (or smaller discounts) may not be captured by standard market share and concentration analysis.
Finally, post-merger output restrictions and/or capacity reductions are demonstrated effects of airline mergers that have been largely overlooked in antitrust reviews. Not only do they raise fares, but they reduce choice for consumers. Well-publicized cutbacks at Cincinnati after Delta/Northwest and conditions imposed on United/Continental at Cleveland by the state of Ohio indicate the gravity of these effects. Mergers of LCCs should be no exception to an examination of the potential for post-merger output and capacity reductions. This is particularly true if the merger eliminates competition on routes/airports and the carriers are adept at managing capacity – as is the case in Southwest/AirTran.
This White Paper by the American Antitrust Institute (AAI) is the first of what is intended to be a series by the AAI on competition in the U.S. airline industry. It is based on publicly available information – no confidential information was provided to the AAI in the course of preparing this analysis. While we do not make a recommendation as to the legality of the proposed Southwest/Air Tran merger, the paper raises important questions that deserve investigation before a decision is made.
Should US Airways make a bid for American Airlines, currently in bankruptcy proceedings, the deal could present a conundrum for antitrust authorities. The transaction would create the largest domestic airline, reducing the number of legacy mega-carriers to three – Delta Air Lines (Delta), United Continental, and US Airways-American Airlines (US Airways-American). This consolidation would occur against an industry backdrop marked by a dwindling fringe of low-cost carriers (LCCs) and growing questions as to whether legacy look-alike Southwest Airlines-AirTran Airways (Southwest) exerts any significant competitive discipline in the industry. The merger could therefore hasten a troubling metamorphosis of the domestic airline industry from one in which hub airports were designed to accommodate multiple, competing airlines to a few large, closed systems that are virtually impermeable to competition and create a hostile environment in which LCCs and regional airlines have difficulty thriving and expanding.
This White Paper, produced jointly by the American Antitrust Institute (AAI) and Business Travel Coalition (BTC), asks: What competitive issues should be the focus of antitrust investigators in reviewing the proposed merger of US Airways and American?
The paper takes the position that a U.S. Department of Justice (DOJ) investigation into the proposed merger of US Airways and American should be informed by mounting evidence on the effects of previous airline mergers, namely Delta-Northwest and United- Continental. The White Paper presents a brief analysis of these combinations and highlights a number of preliminary observations that deserve a more in-depth look. These range from the effects of previous mergers on creating costly post-merger integration problems, substantially reducing rivalry on important routes, producing above-average fare increases, and driving traffic to major hubs and away from smaller communities.
The White Paper continues on to evaluate key competitive issues raised by the proposed merger of US Airways and American that deserve some attention in an antitrust investigation. One is the expected outcome – similar to previous legacy mergers – that the proposed combination could eliminate competition on a number of important overlap routes, creating very high levels of concentration and potential harm to consumers. The risk that the proposed merger could adversely affect small communities through reduced levels of, or lower quality, air service is also worth a close look. Another observation is that the merger is unlikely to be one of complementary networks (as might be argued) and could instead create regional strongholds and solidify US Airways-American’s control over key airports. Any arguments that the merger is necessary to create another “equal-size” competitor to the existing Big 3 systems are also not compelling. The analysis concludes by examining the potential effect of the merger on buyer market power and disclosure of information regarding ancillary service fees.
The joint AAI/BTC White Paper offers a number of concluding observations and recommendations. Among them is that our analysis of the US Airways-American merger– coupled with potential warning signs from previous legacy mergers – indicates that there may be enough smoke surrounding the proposed combination to indicate a potential fire. The merging parties therefore bear a heavy burden is demonstrating that their merger would not be harmful to competition and consumers.
Wednesday, August 21, 2013
Tuesday, August 20, 2013
A blog post yesterday from the Huffington Post characterizes the international debate over aviation emissions, fairly I think, as being "under the radar." The subject certainly has not received anywhere close to the amount of attention in the United States that has been devoted to construction of the Keystone pipeline. This is somewhat understandable, as a pipeline offers not only a much more visceral symbol but also a more tangible objective for advocates on both sides of the issue to rally around. Additionally, evidence to date suggests that both the U.S. media and public are only willing to devote a limited amount of bandwidth to the subject of climate change, and that coverage is easily taken up with stories on Keystone and natural disasters. Still, the lack of discussion of the subject in the U.S. has occurred despite the contentious international disagreement over the European Union's emissions trading scheme and the potentially momentous unveiling of ICAO's global emissions reduction proposal next month. This can't entirely be explained by the absence of aviation emissions from the political agenda as both legislative chambers passed a bill barring U.S. carriers from complying with the EU emissions regulation, which the President signed into law.
With much of his legislative agenda stalled in a divided congress, international aviation is one area, like the Keystone pipeline, where President Obama can support measures to combat climate change primarily through executive action. It is true that the current U.S. Senate will not ratify a Kyoto-like agreement on aviation emissions, but the executive branch should be able to assert a large influence on international policy on aviation emissions through more subtle diplomatic channels such as U.S. representation within ICAO and bilateral negotiations with EU officials over the ETS issue. By the end of the year we'll hopefully know a lot more about the administration's actions on both fronts. I'm skeptical, however, that anyone will take notice given how muted the responses from both sides of the political aisle were to the European Union Emissions Trading Scheme Prohibition Act. Regardless of what U.S. policy should be with regard to carbon emissions from international aviation, the issue undoubtedly warrants greater public attention.
Monday, August 19, 2013